Will Gold be the Last Man Standing as Perfect Storm hits Markets?

From the plunge in European stock markets beginning Monday 24 February, instability and volatility in financial markets across the world has continued to reel for some three weeks now. In fact, the market carnage and turmoil has been progressively intensifying leaving no asset class immune. A generational perfect storm.

Triggered by the rapid spread of the coronavirus COVID-19, and amplified by a massive fall in global oil prices after lack of agreement on OPEC oil production output, the corrections and gyrations across stocks, bonds, foreign exchange, commodities and everything in between are also arguably an overdue market adjustment to years of asset bubbles, volatility suppression and elevated stock prices created by continuous central bank stimulus and interventions.

Ironically, with financial markets addicted to the artificial liquidity of central bank interventions and conditioned to expect continual rescues, the recent market stress has brought out more of the same with calls for stability in the form of central bank stimulus, interest rate cuts and liquidity injections, calls that are being answered and will continue to be answered by responses over the last two weeks from the US Federal Reserve, Bank of England, and European Central Bank (ECB) culminating in the Fed on the night of Sunday 15 March throwing its entire toolbox   of band-aids at the market including interest rate cuts, Treasury purchases (QE), currency swap line facilities coordinated with the other Big 5 central banks. A classic Hegelian case of problem-reaction-solution, with the risk selloff being the problem, ‘investors’ screaming for stability as the reaction, and central banks stepping in to the rescue as the solution using the coronavirus as a be all and end all excuse for intervention.

The Ides of March – EID MAR

The last three weeks have witnessed ever increasing numbers of record breaking financial press headlines in the form of various ‘biggest index points decline since xxxx’, ‘lowest bond yield since xxxx’, ‘largest oil price plunge since xxxx’, where for xxxx you can insert any number of years which witnessed extreme market events such as 2008, 1987, 2001, or 1991. Likewise, with Friday’s US market ramp up in the last 20 minutes before close, you can also add some “biggest index points gain’ headlines.

 

The key takeaway however is that markets are in turmoil across the board and across the world, and still face huge uncertainty and huge market volatility as they struggle to make sense of future economic growth and the possibility of recessionary scenarios. Futhermore, central bank interventions looks increasingly impotent.

US stock markets are now in official bear market territory, with the leading indices such as the Dow and S&P 500 having each fallen more than 20% from their recent all-time highs. The same goes for equity indices across Europe and Asia. The past week has also seen record lows in US Treasury bond yields  across the yield curve, with all yields from 1 month to 30 years under 1% at times, as the flight from risky assets / flight to safety continues. In this environment, will the US Federal Reserve lower its official interest rates to near zero when it meets later this week? Probably it will.

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